A growing current account deficit that has been weighing on the peso has been fueled mainly by a widening trade deficit, as businesses import more capital equipment needed to drive their planned expansion.

CREDIT RATER Fitch Ratings said that the Philippines maintains a generally “favorable growth outlook” even as overheating risks have begun to show.
“The Philippines’ rating balances a favorable growth outlook, government debt levels that are below peer medians, a net external creditor position and policies geared towards maintaining macrostability against lower income per capita and weaker governance and business environment indicators compared with rating peers,” Fitch said in its Asia Pacific Sovereign Credit Overview for the third quarter that was published late Monday.
“We expect the economy to perform well in 2018, despite a disappointing 2Q18 outturn [of six percent], supported by private consumption and investment.”
It said a steady inflow of remittances and improved labor conditions due to business process outsourcing (BPO) growth would drive up household consumption in 2018 and 2019, and that the rise in infrastructure spending would push up overall investment.
“However, the agency believes the economy faces some overheating risks, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit,” Fitch said.
It said that the country’s current account deficit would widen to 1.1% of gross domestic product (GDP) this year and 1.3% in 2019 and 2020 from 0.8% of GDP last year, “driven by continued strong growth in the import of capital goods associated with the government’s public-investment programme and higher oil prices.”
“The BPO sector’s strong receipts and steady remittance inflows are offsetting these factors and helping to contain a further widening of the current account deficit,” it added.
It also noted that “steps being taken by the Bangko Sentral ng Pilipinas to tighten monetary policy — policy rates have increased by 100 basis points since May 2018 — may contain these risks.”
The debt watcher flagged the risk of overheating in June last year, and more recently in July as it affirmed the country’s credit rating at a notch above investment grade with a “stable” outlook.
Among other key credit raters, Moody’s Investors Service had earlier voiced caution on overheating risks, even as it said in April that these “are not yet material”, while S&P Global Ratings said in May that such event was unlikely.
Bangko Sentral ng Pilipinas and Finance department officials have argued that the growing current account gap was fueled mainly by a trade deficit fueled by importation of capital equipment such as heavy machinery and other durable goods that, in turn, signal an expansion of the economy’s capacity.
Fitch expects the first of up to five planned tax reform packages to improve national government revenues to 16.2% of gross domestic product this year and 16.7% next year, from 15.6% in 2017.
The government targets revenues as a share of the economy at 17.7% by 2022 to fund needed state infrastructure investments of more than P8 trillion till 2022, when President Rodrigo R. Duterte ends his six-year term. That will bring such investments’ share of GDP to 7.4% in 2022 from 5.6% in 2017.
Latest government data show that tax revenues grew 18% year-on-year to P1.47 trillion in the seven months to July, while infrastructure and other capital outlays increased by 41.7% annually to P352.7 billion last semester.
Finance Secretary Carlos G. Dominguez III recently told Fitch that GDP growth could reach “close to 6.8%” this year, which is the debt watcher’s expected economic growth level, below the government’s 7-8% target band. This was after a six-percent GDP growth in the second quarter from 6.6% a year ago and in the first quarter this year, that fueled a 6.3% expansion last semester versus 6.6% in 2017’s first half.
ING Bank N.V. said separately on Tuesday that it expects the central bank to further hike benchmark interest rates even after the 100 basis point increase since May.
In its research note, the bank said it expects the central bank to raise its interest rates anew by 25 basis points later this month, and another 25 basis points in the fourth quarter due to sustained upward inflation pressure.
“Market expects inflation for August to rise to 5.9% from July’s 5.7%… We expect a 25 bps BSP (Bangko Sentral ng Pilipinas) rate hike later this month and another 25 bps in (the fourth quarter),” said the bank, which expects inflation to have reached 6.1% in August.
ING also said it expects the current account deficit to grow even bigger.
“The strong domestic demand continues to worsen the trade imbalance and would likely result in a wider current account deficit. We expect the trade deficit to widen by $10 billion to $15 billion this year on weak exports and moderately higher imports,” the bank said in the same research note.
“Structural inflow especially the growth of OFW (overseas Filipino worker) remittances has been erratic,” it said, noting that “ the result is a larger financing need to supply USD for a larger trade deficit.”
ING meanwhile expects the current account deficit to be equivalent to 1.9% of GDP in 2018 and 2.2% of GDP in 2019. — Elijah Joseph C. Tubayan